Quick Briefing of Investing

There’s no true financial advisor; most are just salespeople. People who are actually “good” at making money are busy doing it amongst themselves and don’t want to attract too much people in their area in fear they will bring down yields. The more people who get into something, the higher the price to get in, resulting in less money to be made, OR whatever they’re offering to the market declines in price due to larger supply.

The theory of making money isn’t very difficult to understand: more risk, more return. Make a budget, put money in the right places, and repeat. It’s just actually doing it.

Investing is like fitness or dating where everyone says something different and you ought to do your own research, as there will always be people trying to tell you their way is the best when it is not. I was 23 when I had two condos in my name (one worth around $350K, another $305K), a $101K car… but that being said my investment philosophies opposed most and though I’ve shared my ideas, no one would have actually dared to take the same risks. I usually ended up arguing with bankers. Think about oil as an example – how many people say Alberta and oil are done and how many people say it’ll come back ?

That being said, for each branch of investments, each branch is its world of its own and requires its own research. Generally the first easiest avenue to start is buying funds or stocks through the TFSA, since income would then be tax free. Mutual funds are usually more expensive than ETFs (exchange traded funds; collection of stocks structured to one individual one you can buy as shares), as the banks take their cut, but some banks let you buy them without paying commission. This helps when you’re just starting out and adding little bits regularly. Questrade I believe still has the no-commission buying program for ETFs, so you can add to those and not pay commission until you sell. Stocks have their own entire worlds of discussions- more below later.

Second is real estate. If you’re renting and don’t see yourself moving far anytime soon, may as well buy, as then you have an (generally) appreciative asset that you contribute to the principal every month. e.g. a $330,000 home you put about 700-800/month towards the mortgage. Later on when you get enough equity, you can either re-mortgage or take a line of credit to invest. Some people glorify increasing cashflow and consistent rent cheques one day when the properties are almost/completely paid down, but from a ROI (return from investment) or ROE (return on equity) perspective, at some point you’re better off re-mortgaging.

From a CASH ON CASH return perspective, real estate does not make much in Alberta. That means many people are happy to see their $300,000 home rise $12,000 in value in a year and collect $15,000 in rent. Take off $2,200 for property tax, 1800 for maintenance (obviously variable), 10000 between commission and legal fees spread over 5 years (assuming you sell 5 years later) = $21000 profit; 21000/300000 = 7% return. However, you might get a bad tenant(s) that don’t pay and/or wear down the place, increasing the maintenance and vacancy bill. Alberta appreciation rates lately are very sluggish in some places, so some people may not see any appreciation. So your actual return may be even lower. There are many other investments that are more liquid (easier to buy/sell), cheaper to trade, and have less headaches that will earn higher returns.

Now suppose you got a 20% down mortgage on the same home: pay 5956/year extra in interest now @ 2.69%, so the profit is now $15,055 instead. But you are investing only $60,000 of your cash instead of the full $300,000, so your ROI is 15055/60000 = 25.1%. Make more money from each of your own dollars. This is the attractive point of real estate – being able to use other peoples’ money to amplify your returns. Most bankers (especially older conservative ones) hate this discussion because it involves debt and debt screams risk, but you have to risk more to make more. For people starting out, this is usually the most realistic opportunity as they don’t have enough cash to make  meaningful cash returns with stocks without taking much more risk. I can go more into cash flow investing versus appreciation investing, tax implications and strategies, multi-family versus condos, detached, furnished rentals, AirBnBs, implications of return on equity vs. return on investment on mortgages, variable vs. fixed rates, etc… but you’re better off messaging me as I could write a book

Now on stocks. You are purchasing a part of a business. Generally for moderate risk, most are happy to see around 8-10%, but it obviously depends on what you get into. Large well-established corporations like the big banks, Rogers, Bell, Suncor, etc. usually pretty stably make that.

Problem is for most people starting out with say, $60,000 in our previous example, 10% is only $6,000 – and that takes a whole year. Not a bad amount, but not a night and day amount. Most stock investors are older experienced investors who already have hundreds of thousands of dollars to grow from, or are risk-averse people who are scared of debt and interest rates seen in real estate. You can use bank money for many stocks too (i.e. purchase on margin), but usually banks will only allow up to 2x leverage (double your buying power).

Stocks are a nice way to spread your money apart (diversification) to different industries and are easy and cheap to trade ($4.95-9.95 to buy, a second time to sell – can be done from your phone in a minute). Diversification helps spread out the risk more so if one industry like oil shits, then you do not take as hard of a hit. This is why ETFs and other funds have become so popular, as they provide a simple way to provide a wide exposure to many different industries/stocks. But the trade off is less potential money to be made, as if one industry does very well, only part of your money is in it. Funds and ETFs also do not pay dividends (every 3 months, the companies put a certain % as cash into your investing account).

Smaller-caps (smaller companies) have much more room for growth and hence can earn much higher returns, especially when they get bought out. Sometimes you can double your money in less than a year. But they often do not pay dividends and are far riskier; they are areas that require very particular research and experience to make money from. Some people have experience in the industry and know which ones are good buyout candidates and have good profitably potential, and vice versa. Most smaller listed companies in Canada are oil and gas and mining-based and are banking on being bought out after making a successful producing mine or oil project, or the wells/mines/etc. being profitable in the future.

Many people shun stocks, especially the riskier ones, because they are risky. When you buy a stock, you are buying part of a business. Businesses do not always make lots of money every quarter. Sometimes they do well, sometimes they do not. The market and general public is very psychological, so a company’s performance can make your shares bounce up and down wildly. Smaller businesses have more potential to get big or go down. Most people do not understand this and freak and hit SELL just because one day their shares dropped by 3%, when the company’s fundamentals have not changed.

There are also other things like derivatives and currency, but they are often more speculative than for investing, and are their own world.